Must-Know News – June 14, 2010

“June 14 (Bloomberg) — The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

Ã¢â‚¬Å“It is the mother of all bailouts,Ã¢â‚¬Â said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Fannie, based in Washington, and Freddie in McLean, Virginia, own or guarantee 53 percent of the nationÃ¢â‚¬â„¢s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them.”

“President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid “massive layoffs of teachers, police and firefighters” and to support the still-fragile economic recovery.

In a letter to congressional leaders, Obama defended last year’s huge economic stimulus package, saying it helped break the economy’s free fall, but argued that more spending is urgent and unavoidable. “We must take these emergency measures,” he wrote in an appeal aimed primarily at members of his own party. ”

“June 14 (Bloomberg) — Spending cuts by state and local governments from New York to California may act as a drag on the economy into 2011, only the second time in more than a half century that such reductions have restricted growth for three consecutive years.

States face a cumulative budget gap of $127.4 billion as 46 prepare for the start of their fiscal year on July 1, according to a report this month by the National Governors Association and the National Association of State Budget Officers. They will have to fill that hole largely on their own, as aid from the federal government under programs including President Barack ObamaÃ¢â‚¬â„¢s $787 billion stimulus package starts to wind down.

State and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 after shaving it by 0.02 point in 2010, said Mark Zandi, chief economist at MoodyÃ¢â‚¬â„¢s Analytics Inc. He also sees the governments lopping payrolls by 200,000 during the next year after reducing them by 190,000 in the 12 months through May.”

“BP shares dived again Monday in London trading after a group of U.S. senators asked the company to set up a $20 billion escrow fund to cover costs of the oil leak in the Gulf of Mexico.”

“Respected oil industry analyst Matt Simmons told Fortune Magazine last week that a BP bankruptcy filing was likely within a month. “They’re going to run out of cash from lawsuits, cleanup and other expenses,” he said.

“One really smart thing that Obama did was about three weeks ago he forced BP CEO Tony Hayward to put in writing that BP would pay for every dollar of the cleanup. But there isn’t enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this, my guess is that they’ll panic and go into Chapter 11.” ”

“China hopes that U.S. politicians will Ã¢â‚¬Å“seriously considerÃ¢â‚¬Â how to solve the structural problems in their economy and not blame others, Qin said today. The U.S. should not politicize the yuan or use it as an excuse for protectionism, he said in a statement in response to a question about the U.S. lawmakersÃ¢â‚¬â„¢ proposal.”

“The exchange rate isnÃ¢â‚¬â„¢t the main reason for the U.S. trade shortfall with China, Qin said, adding that the gap is due to the division of labor brought about by globalization. WashingtonÃ¢â‚¬â„¢s restrictions on technology exports to Beijing are also an important reason for the imbalance, he said.”

“Euro-zone banks hold almost two-thirds of exposure to riskiest regions”

“LONDON (MarketWatch) — French and German banks remain the most exposed to Europe’s riskiest economies, holding nearly $958 billion of debt from Spain, Portugal, Greece and Ireland, according to the latest figures from the Bank for International Settlements.

The total for France and Germany represents 61% of the $1.58 trillion exposure held by banks in the euro zone at the end of 2009 the BIS data released late Sunday showed. In turn, the euro-zone banks accounted for almost two-thirds of the total worldwide exposure of internationally active banks to those four countries.

Of the combined exposure of French and German banks, around $174 billion was sovereign debt, while the remainder was owed by individuals and companies, the BIS said. ”